Contract for deed

[xm72mhd]

A contract for deed, in most cases, is simply a financing arrangement. What does it matter if the buyer is paying the owner directly or the bank?

Usually I find the contract for deed in situations where financing is unavailable or it is a family situation where the payments are forgiven or modified, not where the sellers really wanted to play the role of the bank for a stranger. If what I say is so, then what adjustment needs to be made when the market is non-existent without a contract of deed or therewas not an exposure time for a specific property? In other words how do you compare a contract for deed with the more conventional forms of financing with arm's length sales?

 

[Brad Ellis]

Richard,

Both Pat and Edd have this right. Pat even gave you one of those circumstances which these contracts usually prohibit- the right to further encumber the property.

On contacts that I have done they do not retain the right to rent the property, they have no right to modify the property AND, if I want to, I can prohibit the rights of inheritance. And I have seen all these conditions in the various contracts I have read over the years. In fact, prohibitions against modifying the property are pretty common as well. So, too, are the exhortations for maintaining the property adwequately that are common as well.

The question of inheritiance is but one of the bundle of rights. Take ANY of the rights away and you have something less than fee simple.

About the only issue I have with any of Pat's statements is something that may have changed since I did my last contract for deed deal years ago back in IL. Back then, at least, I did not have to go thru the foreclosure process to get the buyer/tenant out- I simply had to declare default and the courts would give me the property back- right down to an evication notice.

Not sure about IL today but many states do operate in that way today. Let me tell you, that can save a ton of time.

Stephen,

No- not limiting this to SFRs at all. And I am aware3 that for some property types in certain markets this can be the norm. IF it is the norm (say for small farms, small commercial, etc.) then OK- nothing is absolute.

BUT, I think you would have to KNOW or FIND out that the transaction is representative of the market. Becaue most of these buyers- at least for SFRs/condos/SRIPS could not buy the property without seller financing, I maintain that using them as comps requires a lot of knowledge that an appraiser will have a hard time determining- and this is more pronounced when dealing with unrecorded contracts.

As to witnesses, again not an absolute requirement. But, absolutely more enforceable with one or more. I know that in IL it is a problem- just ask your own lawyer if he will execute and feel comfortable with a will, advance medical directive, trust, etc. without providing for witnesses.

Brad

 

[moh malekpour]

In order for a property to be a sale comparable comp, its transaction needs to be recorded, it needs to have doc#, the tile of the property has to be transferred from the seller to the buyer.
Land contract has a shadow title transferance. The actual title remains with the seller till the last payment is paid. If there is no title transferance, there is no recording in the county and if there is no recording, there is no doc# and no sale transaction evidence. If you want to take the MLS transaction as the evidence of the sale, it may not wash as a real sale.

There is a similar situation in leasehold transaction but there is usually a recording and doc# for that transaction but there is no sale price for that transaction because the contracted sale price doesn't include the land and improvement and is not the sale price of the property but the sale price of the improvement + the lease value.

 

[Pat Butler]

Brad- we've been a judicial foreclosure state for as long as I remember, probably around 20 years. Perhaps you've been around longer than that.

Illinois is considered mostly a lien theory state (or some would say modified lien), and that requires judicial foreclosure in order to terminate the buyer's interest.

This 'witness' information sounds like something that is unique to other states. Usually just a memorandum of contract would be recorded at the county and the respective parties would retain their original paperwork (contract-for-deed). They typically would have gotten that original paperwork notarized, so that might be similar to having a witness.

In the event of the death of one of the parties, a sale can be facilitated pursuant to the terms of the contract for deed.

If one of the parties such as the contract seller cannot be found then it's sometimes possible to purchase additional title insurance to cover any future claims on their interets. More likely, the other party would go to court to have the title 'perfected' which is basically nothing more than a judge interpreting the terms of the contract for deed and basically protecting the missing party's interest in their absense.

I bought a house one time where there were two owners. They were investors and one guy moved out of the state many years earlier. The remaining partner didn't even know where his partner had moved. Fortunately, the title company had the known owner sign some documents which allowed them to cover my interests against any future claims. The resident owner paid the cost for that additional coverage.

 

[Mike Garrett RAA]

So...I think I wold avoid using a property sold on a contract for deed as a comparable UNLESS...I had nothing else I could use.

Colorado real estate law says the contract should be recorded. In addition, the vendee has certain equitable interests or rights. In years past, contract for deeds were the primary method of selling land mainly because it allowed the seller to take back the property without going through strict foreclosure. The legislature felt this was unfair to the buyer and modified the laws so that the buyers could have equitable interest in the property. So, it depends on your state laws.

 

[Mike Garrett RAA]

Isnt this essentially a PURCHASE ... in a land contract the buyer doesnt go into deed until the purchase is complete ...

Report the owner of record, report the contract as having been signed (yes or no) in last 36 months, and discuss the existing contract for purchase (land contract / contract for deed).

I think you mean "does not go into title" rather than deed.

 

[Brad Ellis]

Pat,

I am aware that IL is a judicial forclosure state but your post confused me since you do not need to foreclose under most contract for deed scenarios.

Just to be sure I called my IL real estate attorney and he confirms. What he does is have a QC claim done and held by a title company (he is also a title officer). then on default, he just has it exwecuted. Of course he still needs to go to court to get the jusdge to issue an eviction notice.

But, it is not an actual foreclosure and all the typical periods- like the 9 month notice period- go by the boards. There are some notice periods but they appear to be different and much faster.

Brad

 

[Stephen J. Vertin MAI]

With equitable title there is no guarantee that title will eventually pass to the buyer unless that buyer, and seller, comply with terms of the land contract.

The same is true if you do not pay the bank

In effect, you have multiple parties with interests in said property and their interests (especially the buyer) are not fully realized unless everyone acts according to the contract.

That is true with any contract.

What are they doing, holding the deed on a condition subsequent such as payment?

Yes

In other words how do you compare a contract for deed with the more conventional forms of financing with arm's length sales?

As with any financing it depends on the terms. Some are at market rates. If this is the case there would be no adjustments.

the right to further encumber the property.

I do not know what is meant by this. Any property can be refinanced if the value is there and the borrower has good credit. Certainly they can get a loan and buy the current deed holder (seller) out. I would agree that they may not be able to take out equity in the future if, and only if, the deal remains a contract for deed situation. However, we are not talking about the future. We are talking about a sale in the present.

On contacts that I have done they do not retain the right to rent the property, they have no right to modify the property AND, if I want to, I can prohibit the rights of inheritance.

But that is not applicable to all contracts. I have had contract for deeds in both Texas and Illinois and leased both properties. Further I did many improvements.

I maintain that using them as comps requires a lot of knowledge that an appraiser will have a hard time determining- and this is more pronounced when dealing with unrecorded contracts.

I have seen contract for deed sales on Loopnet. Because most of the information is broker obtained it is common in some markets. You simply call them and asked questions. Much of the other information is true for any sale.

As to witnesses, again not an absolute requirement. But, absolutely more enforceable with one or more. I know that in IL it is a problem- just ask your own lawyer if he will execute and feel comfortable with a will, advance medical directive, trust, etc. without providing for witnesses.

So have a witness sign on the contract for deed. I just filed a quite claim which required a witness. It can be done at any bank or currency exchange. You do not even have to bring one in. There are people there who can serve.

In order for a property to be a sale comparable comp, its transaction needs to be recorded, it needs to have doc#, the tile of the property has to be transferred from the seller to the buyer.

Some states do not have doc#?. Is this your definitions or is this from an authoritative text? There is nothing wrong with personally defining things but the problem comes when you try to make them applicable to others who have no idea where your ideas come from.


I do not find these arguments very strong for data exclusion. No argument from me that most contract for deeds are used as a financing tool. But so what? No argument from me that you have to look at these transactions carefully. But that should be done with any sale. Further adjustments for financing are allowed. None of these things exclude these type transactions as sales. I have never heard contract for deeds were not sales. Can anyone quote a well used text in appraisal theory which states this? Or is this an appraisers myth like you can not adjustment pro dated sales backwards for time. Just curious.

 

[Wayne Tomlinson]

Brad,

As I posted several posts back.

There has been a change in Illinois law concerning contract for deed sales.
Early in the term, there is no change. Whenever the time comes that the contract buyer has "substantial interest" in the property, then all or nearly all the rights of a mortgage buyer will kick in. The legisalation does not state what "substantial interest" is, but my attorney said that for practical purposes, approximately one-third seems to work.

The contracts that I have been involved in, the deed was placed in escrow along with the contract, they were placed with a local bank along with directions and when the buyer had satisfied the terms, the deed was delivered along with the title policy completed down to the time the contract was placed in escrow. The proceeds were distributed or deposited by the bank according to the instructions of the seller.

With that arrangement, no one had to keep trackof the seller.

There are many other means to do it, but this is how we did it here and it worked well.

Wayne Tomlinson

 

[Pat Butler]

Here's a good summary of IL Law as it pertains to foreclosing on a contract for deed http://www.law.siu.edu/selfhelp/info/property/cfd.pdf

Brad- what your attorney does might be a gray area. I wonder what would happen if the buyer who defaulted pressed the issue and demanded a judicial foreclosure. IL does allow for consent foreclosure, so I'm assuming it sort of falls into that category- essentially, the buyer is giving advance consent. But our courts are pretty liberal with granting all sorts of rights to somone who is about to lose their house.